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10 hot tax topics

Paula Tallon BBS CTA (Fellow) ADIT FCA Gabelle LLP

Tax Faculty Portal – Online tax support

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What this session will cover

1. Entrepreneurs’ relief – personal companies2. Principal Private Residence elections3. Interest relief for property businesses4. Venture capital reliefs5. ITA 2007, s 131 share loss relief6. Loans to participators7. Dividend waivers8. Giving shares to employees9. Valuations10. Salaried partners

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1. Entrepreneurs’ reliefPersonal company• Hold at least 5% of the ordinary share capital• Able to exercise at least 5% of the voting rights by virtue of

the shareholding• Ordinary share capital

— “means all the company’s issued share capital (however described), other than capital the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits.” ITA 2007, s989

• 5% measurement by reference to number of shares or nominal value? Canada Safeway Ltd v CIR [1973] Ch 374

• Reference to nominal value

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1. Achieving the 5% where EMI is not an option

85%3% each

Investor Employees (5)Investor

Employees (5)

85%15%

20% each

Trading Co Trading Co

Newco

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1. Family companies• No husband and wife aggregation of ownership for either:– Percentage ownership or

– Ownership period• Each must meet the qualifying criteria• Each have lifetime limit of £10m

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2. Principal Private Residence elections

• Must be made within two years from it becoming necessary to determine which is the main residence

-but it can be varied at any time

-change in combination triggers new election

• Elect that every residence is the main one for at least part of the period of ownership

• CG64510 – Use of variations known as “flipping”

• Reduction in final period exemption to 18 months from 6 April 2014

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2. Tax cases involving PPR elections

• Ellis and another v HMRC [2013] UKFTT 775 (TC) • HMRC argued that property was not the main residence and

that election invalid

• A J Clarke [2011] UKFTT 619 (TC) • Case involved multiple properties• Intention to live in properties permanently

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3. Interest relief for property businesses

Example• Individual buys a house for £100,000• Occupied as main residence for 3 years

• House then let out, when market value £500,000• The owner wishes to release equity from the property

business by taking out a loan on the property

Considerations • Maximum amount of deductible loan interest• Period of residence for PPR

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4. Venture capital reliefs

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Relief Income tax relief on investment

Income tax on dividend from investment

CGT exemption CGT deferral

SEIS 50% Y Y 12/13 100% exemption

13/14 onwards 50% exemption

EIS 30% Y Y Y

VCT 30% N Y N

4. SEIS

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Currently• Income tax relief @ 50% up to £100,000 invested• Exemption from CGT on future sale of shares if held > 3 years• CGT deferral relief:

– 12/13 100% of gain reinvested up to £100,000– 13/14 50% of gain reinvested up to £100,000

• Budget 2014: SEIS relief will become permanent

5. ITA 2007, s131 share loss relief

Use of capital loss against income (s131, ITA 2007)

• Loss on qualifying shares (eg negligible value)– EIS / SEIS– Qualifying trading company shares subscribed for by the

individual– Loan conversions

• Computed as for capital gains• Current or prior year claim• All or nothing claims

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6. Loans to participators Bed and breakfasting

Within 30 days• Repayments totalling £5,000 made by a person to close company, and• A new loan or advance of at least £5,000 is made to that person

At any time• Immediately before a repayment is made £15,000 is owed by a person

to a close company• At any time after the repayment the close company makes a new loan• At the time of the repayment any person intended that the new

payment would be made or arrangements had been made for the payment to be made

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6. Loans to participators (2)Arrangements• No statutory definition • Can be:

– Unilateral;– Just a third party– Just the company

Repayments• Real cash payments• Loan write-off• Book entries• Dividends• Emoluments

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7. Dividend waivers

• Timing – before dividend declared• Commercial purpose behind the arrangements• Gratuitous act – nothing in return

• Distributable reserves of the company• Settlements legislation – taxable on spouse• Not within s626, ITTOIA 2005 (not a gift of the shares)

• Donovan & McLaren (TC03188)

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8. Giving shares to employees

Example• An employee is given 2% of the shares in an unquoted trading

company with an:– Unrestricted MV of £5,000– Actual MV of £3,000

• The employee is required to pay £3,000 for the shares• The shares are sold 3 years later for £100,000

Considerations• s431 elections• NICs – readily convertible assets• Use of EMI wrapper

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8. The calculationUMV 5,000 IT rate 40%AMV 3,000 CGT rate 28%Proceeds 100,000 Enterpreneurs' relief 10%

1.No s431 electionIT CGT Total tax

At issue - At disposal 15,520 16,296 31,816

2. s431 election

At issue 800

At disposal 26,600 27,400

3. EMI wrapper - exercise price AMVAt grant 0At exercise 0At disposal 9,700 9,700

9. Valuations

• When to obtain HMRC approval

• Methodology

• Discounts

• Specific situations– Goodwill– Trade related properties– Shares: PAYE / readily convertible assets

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10. Salaried partners(Draft FB 2014 sch. 1 part 1)

Applies to• Members of a UK LLP with terms that are more akin to an employment

than self employment

• Applicable from 6 April 2014

ImpactAmount paid by LLP = salary

Individual PAYE, class 1 primary NICs, Within benefits in kind rules

LLP PAYE, Class 1 secondary NICsSalary and NICs tax deductible

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10. Salaried partners – 3 conditionsIf all 3 conditions are met a member (M) is treated as a salaried employee

A. Substantially rewarded through a fixed salary

B. Does not have significant influence

C. Contribution to the LLP is less than 25% of disguised salary

To recap …

1. Entrepreneurs’ relief – personal companies2. Principal Private Residence elections3. Interest relief for property businesses4. Venture capital reliefs5. ITA 2007, s 131 share loss relief6. Loans to participators7. Dividend waivers8. Giving shares to employees9. Valuations10. Salaried partners

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Thank you for listening

Paula TallonGabelle LLP

Contact Details

Tel: 020 7182 4034Direct Line: 020 7182 4710

Fax: 020 7182 4142Mobile: 07900 902 700

paula.tallon@gabelletax.com

www.gabelletax.com

Or call the TaxDesk on 0845 4900 509

Tax Faculty Portal – Online tax support

© Gabelle LLP 2014

Personal access to a wealth of current and archived practical online resources including:

• Practical advice, news and briefings on hot topics• Monthly Tax Review (MTR) – with deeper insights on current

legislation• Reference documents sourced from the FTA and IFA; and• Upcoming events and online seminars

Member offer – 50% off TaxDesk helplineGabelle are offering members authoritative tax support through the TaxDesk support helpline

TaxDesk delivers a range of high level and complex tax advice and operates Monday – Friday from 8am to 6pm and is discounted by 50% for members

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Disclaimer

While care has been taken to ensure the accuracy of the contents of this document, no responsibility for loss occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the lecturer. Delegates should take specialist advice before entering into any specific transaction.

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